Brocade forced to restate results

Company also facing SEC and DoJ investigations.

By
Chris Mellor
| May 17, 2005

Share

TwitterFacebookLinkedInGoogle Plus

Brocade has become the latest IT company forced to restate its results due to accounting errors. It also confirmed it is under investigation by both the US Department of Justice and the Securities and Exchange Commission over its accounting measures.

The company will restate its accounts for financial years 2002 through 2004. According to a statement by the company, it did not charge enough for stock options granted to employees. From August 2003 to November 2004 it granted stock options contrary to its own guidelines.

An internal audit reported that: "The company concluded that it could not rely on the documentation used to support the recorded measurement dates for stock options granted in that period." In other words, it got the dates wrong.

Furthermore: "From 2001 through 2004, the Company had not appropriately accounted for the cost of stock-based compensation for certain employees on leaves of absences (LOA) and in transition roles prior to ceasing employment with Brocade." People could continue exercising their stock options for up to three months during a leave of absence. Some did it for longer.

In conclusion: "Management estimates the total increase in non-cash compensation expense related to these matters to be in a range of approximately $31 million to $52 million for fiscal years 2001 through 2004."

The US Securities and Exchange Commission and Department of Justice are working on a joint investigation into Brocade's stock option practices.

Brocade CEO Michael Klayko said: "The Board and management team are absolutely committed to the highest standard of accounting and continuously improving our internal controls and compliance with our policies. I have confidence in my team and we remain focused on executing to our business plan."

Greg Reyes was CEO during the period in question. It is reported in TheStreet.com that Baird analyst Daniel J. Renouard believed that "the involvement of the DoJ implies something other than informal, in our opinion, and we believe the former CEO - and possibly others - could be implicated in wrongdoing around the stock compensation issue."

Another storage vendor to suffer its own accounting woes has been Veritas. It was forced to restate its results last year following accounting errors in the way expenses and revenue were dealt with. Its results for 2001 and 2002 were restated and its 2003 results recalculated, losing $10 million to $15 million of revenue.

It also transpired that Kenneth E. Lochnar, the chief financial officer at the time, had lied about having a Stanford University MBA on his CV. Veritas was subsequently bought by Symantec.